Czechs Report Record Budget Surplus, Worse VAT Collection

Everyone talks about taxes. It is an “old hat” of political shootouts, media comments and pub chitchats. Taxes are unfair, too high, too low, taxes are collected inefficiently, or quite the opposite: they are adequate and the government does great… But fiscal policy is not just about taxation. And, moreover, the abovementioned debates often miss actual numbers. And what are the actual recent fiscal numbers in the Czech Republic? Let’s look into that.

The Czech government projected the state budget to end in deficit CZK 100 billion in 2015. Some time ago, I announced that the forecast is very pessimistic according to this year’s economic development. Nevertheless, considering the recent economic boom, the Czech fiscal reality should definitely get better. And a development in the first half of this year confirms that.

Over the first half of 2015, the state finances ended in a surplus CZK 22.65 billion. In comparison with the previous year, we could label it a perfect result. Just look: In the first half of 2014, the state officials reported a surplus only CZK 1.45 billion.

Why is there such a big difference? The answer is prosaic – EU funds. The increase in total revenue (+CZK 51.7 billion, i.e. + 9 %) to the level CZK 618.15 billion is almost fully generated by an inflow of the EU funds (+CZK 49 billion). Better situation on the labor market helped higher collection of social security insurance (+CZK 10 billion) and also better collection of income tax (+CZK 4.3 billion).

These improvements eliminated missing VAT receipts (-CZK 5.3 billion; the decrease is partly caused by incorrect accounting in 2014 and partly by an implementation of lower VAT rate on baby food, books and pharmaceuticals since January 1, this year). Last but not least, a worse performance of excise taxes on tobacco products participated in a decrease on the revenue side of the budget (-CZK 4.2 billion), which is the effect of stockpiling before increase in tax rates during the last year. In this year’s budget revenues (logically) an extraordinary income from the 2014 auction of frequencies for LTE mobile networks (one-shot revenue 8.3 billion CZK) is absent.

On the expenditure side, the state budget recorded a growth by CZK 30.6 billion (+ 5.2 %) to the level CZK 618.2 billion. There was a growth in capital expenditures (+CZK 19.1 billion, especially investment programs co-financed from the EU) and also an increase in subsidies to budgets of counties, cities and municipalities (+ CZK 7,9 billion). However, an increase of social transfers by CZK 6.5 billion should not escape our attention.

“More welfare state” was a motto of social democrats, the leading party of the Czech government coalition. Social transfers, represented mainly by retirement pensions or unemployment benefits, create the main part of Czech public funding – to be precise, 42.1% of total annual expenditures. 2015 annual fund for social transfers (CZK 512 billion) has been so far consumed by less than a half (CZK 247 billion).